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Video: Analysis of Google-Motorola deal

NEW YORK — Google will buy phone hardware maker Motorola Mobility Holdings for $12.5 billion to bolster adoption of its Android mobile software and compete with smartphone rival Apple.

In its biggest deal to date, Google said it would pay $40 per share in cash, a 63 percent premium to Motorola Mobility's Friday closing price on the New York Stock Exchange.

Not only is this the largest deal for the search giant, it is by far its most dramatic deal in company history. It promises to alter the landscape of the smartphone business and it could become the first serious challenger for Apple's iPhone business.

Motorola Mobility was separated from the rest of Motorola in January. The company has remade itself as a maker of smartphones based on Google's Android software, but has struggled against Apple and Asian smartphone makers.

Google, maker of the Android mobile phone operating system software, has been forging ahead in the smartphone market but has been hampered by a lack of intellectual property in wireless telephony.

Earlier this month, fresh from losing a bid to buy thousands of patents from bankrupt Nortel, Google Chief Legal Officer David Drummond blasted Microsoft, Apple, Oracle and "other companies," accusing them of colluding to hamper the increasingly popular Android software by buying up patents.

A source close to the deal said Google swooped in to buy Motorola Mobility after losing out on Nortel's patents.

"It is much more than just a patent sale. It is obviously more than a strategy shift for Google that is very significant," the source said.

"Motorola Mobility's total commitment to Android has created a natural fit for our two companies," said Google CEO Larry Page in a statement. "Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers."

The Motorola Mobility deal may represent a victory for activist investor Carl Icahn, Motorola's biggest shareholder. He has urged Motorola to consider splitting off its patent portfolio to cash in on surging interest in wireless technology. As of July, Icahn held an 11.36 percent stake in the company.

In a statement, Icahn said the deal is "a great outcome for all shareholders of Motorola Mobility."

Google, which plans to run Motorola Mobility as a separate business, said the deal will close by the end of 2011 or early in 2012, and requires regulatory approvals in the U.S., European Union and other areas, as well as the blessing of Motorola Mobility's shareholders.